As you come to read your millionth “hot take on tax” piece, I have some bad news. My “hot take” is less than riveting.

I am not going to tell you the Tax Working Group’s (TWG) final report will collapse the New Zealand stock exchange, cause rents to double, or ruin the “kiwi way of life”.

In fact, what I'm going to tell you, you already know – it’s complicated and political.

But here’s the interesting bit – it’s so complicated that I don’t believe the Government currently has the information it needs to make an informed decision on the Group’s recommendations.

And it’s so political, that I fear it won’t bother getting this information.

Let me explain.

All 11 members of the TWG agree more of the gains from selling rental property should be taxed than is currently the case under the bright-line test (introduced by National, but extended from two to five years by the Coalition Government).

However only eight support broadening this approach to include all land and buildings, business assets, intangible property and shares.

The Group concluded: “The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains. It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time.”

Where's the modelling?

It’s almost like the Government threw the political hot potato that is tax reform at the Group, hoping it would diffuse some of the heat by making the tough calls on what do.

But instead, the Group has thrown the potato – still hot – back to the Government, leaving it to make the final decision with a smorgasbord of options in front of it.

The problem is, it hasn’t given the Government a bunch of models to accompany these options. It hasn't said, 'If you go with Option X, we expect the consequences to be Y.'

It's provided really good graphs like the one below that show how the cost of applying a capital gains tax to all assets (other than the family home) would fall on different households.

However it hasn’t provided similar graphs showing how the costs would be spread if a capital gains tax was only applied to investment property, for example.

The TWG's analysis in general (around the fiscal impact and so on) assumes the gains from investment property, shares, land, business assets and intellectual property would be taxed.

Given the Government's response to the report has been that it won’t “throw the baby out with the bathwater,” or roll with all the TWG’s recommendations, one can safely assume it'll implement a watered-down version of what the TWG has suggested.

I'm sure we can all agree that only taxing gains from property investment, or "extending the bright-line test," would be the most politically palatable way forward.

While the Group has recommended cherry picking the assets to come under the tax, the Government could also go against the this advice and implement a lower tax rate than the marginal one for individuals proposed.

The question is, does it know what the consequences of either of these options would be?

PM unclear on use of external consultants

Some of the papers prepared by the TWG Secretariat for consideration by the TWG include distributional analysis, however none of the reports include the data I believe the Government needs that shows how different households would be impacted if a capital gains tax was applied to only certain assets.

I asked the IRD if this sort of modelling was tucked away somewhere else. It said no.

It also said the TWG Secretariat didn’t have the resource to do this sort of modelling for media, despite the public interest.

Surely the Government will employ external consultants to do this work if the TWG and IRD aren’t?

Prime Minister Jacinda Ardern didn’t seem to think so, but wasn’t entirely sure, when I asked her on Monday afternoon. She said: “Sometimes in these areas they are complex. I have no information that suggests to me that we’ll be doing that.

“Again, I wouldn’t necessarily have that layer of detail, but my view would be that predominantly we will probably more than likely be receiving that directly from IRD.

“But again, I won’t necessarily know the way in which IRD make their operational policy advice.”

More consensus-building than Excel spreadsheet studying?

There is a possibility that what started as a simple search to find out what the effects of excluding certain assets from a capital gains tax would be, has led me down a rabbit hole and seen me lose perspective of the bigger picture.

But if I feel I don’t have enough information to write a well-informed “hot take” on the TWG report, I don’t know how the Government has enough information to make a well-informed decision on something a tad more important... the tax system.

No doubt it has rallied the troops at the IRD to do the modelling it deems necessary.

But given that in the more than three weeks it has had the TWG report it hasn’t asked for the information I would’ve thought was key, and given it only has about two months until it needs to tell the public where to from here, I’m dubious about the information it’s working with.

It makes me think Labour, the Greens and NZ First are putting more effort into trying to come to some sort of consensus, than they are studying the evidence to make the best policy.

Ardern, at a press conference on Monday, put more emphasis on dispelling myths around how harmful a capital gains tax would be, than marketing it as a good idea.

She was at pains not to pin her colours to the capital gains tax mast, highlighting how her job was to build consensus among the coalition partners.

Sure, this consensus building is a part of MMP, but it is becoming an increasingly problematic hurdle for this government.

While politics adds to the complexity of changing the tax system, let’s hope it doesn’t overshadow the complexity that needs to be grappled with.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

34 Comments

Good points, JT. Attempting to model outcomes of scenarios which are dependent on:

Behaviours of affected parties

Timing of decisions made by those parties, which may well be measured in decades

Valuation of assets controlled by said parties (= the tax base)

Rate of tax applied to that base (again, varying over time e.g. with possible lead-in or tail-out percentages

More factors which I'm sure commenters will think of

is a practically impossible task for even the best-resourced group. Which is, I suspect, what the Minority Report is gently trying to convey. In all respects, the whole thing is a leap into the unknown.

Sorry Kate I don't agree. Not with either of our Major parties.
Let then get their policies right and voted on by the people. Not a populace vote and then sneaking in by the back door other policies. ie no taxes, then weasel willying their way around it by saying that the opposition did it when they were in power

Sorry Kate I don't agree. Not with either of our Major parties.
Let then get their policies right and voted on by the people. Not a populace vote and then sneaking in by the back door other policies. ie no taxes, then weasel willying their way around it by saying that the opposition did it when they were in power

CGT is an immensely inefficient envy tax, with huge compliance costs, that will only serve to enrich the lawyers and accountants tasked with working around it. If you want a new tax to actually improve NZ's prosperity then do a universal, no-exceptions land tax. eg rates x 5-10 and drop Income and company tax to compensate. Super cheap to administer and puts an end to inefficient use of land and land-banking that pushes house prices up.

Will a hillside section be taxed at the same as a flat piece of land? Even though one costs vastly more to build on to the same intensity? I mean, it's about efficiency, isn't it? Logic says you should sting people with flat, easy-to-build on vacant land a lot harder than those with hilly sections.

One issue of land tax (unless it is set quite low which makes it a pointless exercise) is that you have to pay it from non-existing cash flows. It will make ownership more difficult for middle income people who pay heavy income taxes and then will need to use the remainder to pay the land tax. Off course if you reduce income taxes on higher brackets, this will be offset by a degree. But that will be giving tax cuts to the wealthy, i very unattractive notion i assume.

Land Tax would always be used in conjunction with lower income taxes. It reduces the ability of the wealthy to avoid, and in NZ's history has been successful in making land available to more NZers rather than fewer.

If the level of reduction in income taxes is enough for middle income people to pay their taxes, then that is fine. However, this forces retired people, those who may be temporary out of jobs etc. to sell. You may call it a more "efficient" use of land (i.e. retired people to move out of a their home and to live in a one bedroom apartment) but dont be surprised if retired or about to retire people dont share this view.

Government already has a rates rebate scheme for low income folks regardless of their age (but of course there is only a small proportion of rates these days that are a land value tax). I've always preferred deferred tax payments - paid when the asset is sold. But of course that only works when a house is mortgage free and the individual is asset rich, cash poor.

TOP already have a policy on this. ie the tax burden can be deferred until sale. However their income will see a significant drop in taxation so the Q is what really is the size of the effect here? ie unless you are some of the few with very big expensive houses but an unusually low pension I cant see how its much of an issue. The next Q I'd ask is is tax being dodged by such a person? Maybe an ebbing tide with expose a few things....

Yes that is an issue. I think way to deal with it is have it accrue against the title with interest charged at govt's borrowing rate. That should allow a retiree to live in a freehold place for 30+ years, something of a reverse-mortgage, before the state owns it all.

But also remember that a land tax would lead to a significant drop in the price of land. Depending on size it would get those house price multiples down into a range familiar only to baby-boomers.

What is wrong with the existing tax rules? If you are in business i.e. playing the property market. You buy the property for X hold it for 3 years and sell it for Y You should pay tax on the gain on sale. Just like any other business asset. If you make a gain after the useful life of the asset you pay tax on the gain?

Time to take a rain check. A ban on oil and gas exploration. A ban on foreigners purchasing NZ property. A reduction in immigration. A regional money fund with worthy purposes sought. A notional 10000 houses promised but few built - even fewer sold. A teeter along the China/USA tightrope with a few wobbles developing. And now a review of the tax system with a another quick response to complexity scheduled. The bath water and the baby are already on the windowsill.

@Jethro you are being generous .......... the houses promised is a staggering 100, 000 , not 10000 , and they will all be sold for less than the cost to build them

Clearly they did not and still dont have a clue that 100,000 houses is a VERY BIG NUMBER , especially when you dont even have 1,000 sections available to build them on

They also dont have a clue as to how a market functions , where , unlike in politics , you have to deal with something called commercial urgency when you are paying interest, and actually have to make a profit to survive

Nor , for that matter, do they have a clue as to what is driving house prices .

And possibly they dont know how much they earn in Royalties from Oil and Gas either .

Last year Andrew Binning (NZ Treasury) and Andrew Coleman (University of Otago) wrote a paper for the TWG that attempted to model the effect of a CGT on residential property on house prices, rents, and the welfare of people who differed in terms of age, income and wealth. I am reasonably sure that if you search the TWG documents you should find a version of their report. My recollection from the time was that its analysis was criticised by members of the secretiariat on a variety of grounds, one of which was that it didn't take into account the amount of tax revenue collected from the owners of buinesses and shares, and thus understated the amount of revenue available to compensate renters should rents increase. The final report does not refer to their paper very much, possibly in light of their criticisms .

Incidentally, the paper also analysed what would happen if the CGT was introduced on all houses, not just rental houses. Since this was outside the terms of reference this was ignored as well. However this scenario highlights what happens if you tax one class of owner (landlords) and not another (owner-occupiers). The paper suggested that a large number of young people would be better off if you taxed all households rather than just landlords, partly because there would be a bigger effect on house prices but mainly because you can afford much larger tax rebates to compensate people for any increase in rents.

well to start with, why would rents increase? Personally I see this claim as a fallacy, ie landlords are by and large already extracting the maximum rent off a tenant they can, ie if the rent goes up the tenant moves on. Certainly for the few renters I know this is the case.

I certainly think a CGT should be a blanket affair anything else can be worked around.

There will be less willingness of landlords to enter the market, and greater willingness for landlords to exit. In most markets if you reduce the supply of an item, the price rises and the quantity purchased falls. (There will be an increase in the number of first-home buyers purchasing, as renting becomes more expensive relative to ownership; and some people will further delay leaving their parent's home to take up flatting.) In equilibrium rents rise.

This assumes there is some competition between landlords to attract tenants, and that an individual landlord does not charge the highest amount the current tenant can bear. There is no evidence that landlords charge the maximum an individual tenant can bear - they charge rents that are competitive with the price of other leased houses in the market.

Incidentally, the model suggests a capital gains tax will increase the fraction of people owning their own home - although it notes that this does not necessarily mean they will be better off. If they buy to avoid increases in rents they can be worse off. The modelling suggests that when people have difficulty raising a deposit and borrowing, tax advantages to landlords can make renters better off if landlords accept artifically low rents. As you know, rents have gone up much less quickly than house prices in New Zealand since 2000.

Not that this justifies tax advantages for either landlords or owner-occupiers - it is simply a statement of the effects one might expect to see as a result of the interplay of borrowing restrictions and tax regulations. Personally, I am of the view that it is a bad thing that NZ has one of the more distortionaly tax environments for housing in the OECD - not because of the way we tax housing, but because we tax owner-occupied housing so much less than other asset classes. The Tax Working Group disagrees - they argue that in practice it doesn't matter if owner-occupied housing is a tax-advantaged asset class, as people don't respond to these tax advantages. (Most international tax theorists argue that if you make residential property a tax advantaged asset class you will artifically increase its price and disadvantage young people. The TWG appears has discounted this analysis.)

Thank you for pointing this out Andrew. I trust the paper you are referencing is, 'Capital gains taxes and residential housing markets' in Appendix A of this TWG report. This is really thorough stuff I trust the Government will be considering.

For interest.co.nz readers who are interested, here is a summary of Andrew Coleman and Andrew Binnings' findings:

(i) Imposing a capital gains tax on landlords can worsen overall welfare, while imposing a capital gains tax on all houses can improve it.

(ii) Introducing a capital gains tax raises rents more than house prices fall. This affects poorer and younger households as they are more likely to rent. House prices don’t fall by quite so much because owner-occupied housing is still tax advantaged, as imputed rents are not taxed.

(iii) In the paper we have examined the effect of a capital gains tax when capital gains can be expected to be ongoing as they stem from generalised inflation or real income growth. The results are similar. Other factors that have generated house price growth like high population growth have not yet been analysed. Some factors such as declining interest rates that have contributed to high house price growth in the past are unlikely to occur on an ongoing basis and may not contribute to future house price growth, or could be reversed.

Interest.co.nz has also published a number of pieces Andrew Coleman has written on taxing capital income. You can see these here.

House will be taxes with the exception of family home that is for sure if CG is to be introuduce in watered down version, also. So anyone who is holding the property without holding capicity should get out fast to avoid further lose, for CG in any form is bound the hosing market (may or may not hit other sector for political reason)

and as a landlord when you want to cash up all you do is move into house A, sell it 4~6months (say) later and move into your "B" repeat until all house are sold. Just takes a bit of planning. Needs to be on every sale to actually work or its a waste of time.

I think even the IRD is smart enough to catch onto that plan after the second or third house. If you only have one rental then you'd probably get away with it, but selling down 5 houses over say 3 years and claiming they were all "the family home" would no doubt get you a visit and a please explain. Particularly when you've been claiming rental related expenses on them.

Do you really think that ird are that stupid that they will miss this in the legislation ?
The reality of right now is, if your intention was to run your rental business at a loss and are reliant on capital gains as your profit in this business model, its taxable right now.
Admittedly it's a stupid business model, but the sheeple will tell you its risk free and fraught with future world trips.